FOREX-Dollar extends post-FOMC rebound; sterling dented by fiscal worries

By Saqib Iqbal Ahmed

NEW YORK, Sept 19 (Reuters) - The U.S. dollar rose on Friday, extending its rebound against most major currencies, as traders reassessed the near-term outlook after the Federal Reserve cut interest rates this week but signalled that further easing would proceed only gradually.

The U.S. Dollar Currency Index =USD, which tracks the greenback against six major peers, was up 0.3% at 97.588 on Friday. The gauge, which fell 1% on Monday and Tuesday on expectations the Federal Reserve might flag a rapid series of rate cuts, was nearly flat for the week.

On Wednesday, the Federal Reserve delivered an expected rate cut but signalled little urgency to lower borrowing costs quickly in the coming months. The Fed's rate forecast or the so-called "dot plot" showed projections of two more rate reductions this year.

"It's really a week of two halves," Marc Chandler, chief market strategist at Bannockburn Forex, said.

"The votes, the actual dots, were not as dovish as the statement and the concerns about the labor market suggested," Chandler added.

With the dollar having come under selling pressure in the days before the Fed decision, the U.S. currency may have room to rebound further.

"What we're telling our clients is that this is just a counter-trend move. If you have to sell dollars, you'll have a better level shortly," Chandler said.

STERLING SLIDE

Sterling fell on Friday after Britain's borrowing surged past official forecasts, further complicating the country's fiscal outlook, while the yen firmed after the Bank of Japan's decision to hold rates steady revealed divisions on the board.

The pound was one of the worst performers among G10 currencies, mirroring investors' concerns that British finance minister Rachel Reeves may not be able to keep her budget under control.

The currency was down 0.5% to $1.3492 GBP=D3, heading for its biggest two-day drop since late July.

"Despite a better reading from UK August retail sales data, poor UK government borrowing data have highlighted the difficulties Chancellor Reeves faces in delivering the UK budget in November," Jane Foley, head FX strategist at Rabobank, said.

Data published early on Friday showed British retail sales rose by a stronger-than-expected 0.5% in August, helped by sunny weather, but sales growth in July was revised slightly down.

The borrowing figures - the highest for the first five months of a financial year since 2020 - could pave the way for further tax increases.

Even before Friday's data, Reeves had been expected to announce new tax increases in her November 26 budget to stay on track to meet her fiscal rules and avoid fresh upheaval in financial markets.

BOJ DISSENT UNDERPINS YEN

In Asia, the BOJ board dissent came as a surprise, unsettling equity and bond investors and putting their focus back on how soon the BOJ will next raise interest rates.

"This was unexpected, and suggests that perhaps policy rate hikes may be coming sooner than anticipated," David Chao, global market strategist for Asia-Pacific at Invesco in Singapore, said.

The central bank's next meeting on October 30 will now be a live meeting, and "the best chance for a rate hike for the rest of this year," he added.

In a volatile session after the BOJ decision, which saw the board maintain interest rates at 0.5%, the yen surged initially but later pulled back, leaving the dollar down about 0.1% against the Japanese currency at 147.85 yen JPY=EBS.

After the decision, BOJ governor Kazuo Ueda told a press conference that the central bank would continue to raise rates if its economic and price forecasts prove correct.

In the meantime, Japan's ruling Liberal Democratic Party (LDP) holds a leadership race on October 4 to replace outgoing Prime Minister Shigeru Ishiba, with markets uncertain whether the outcome could impact the BOJ's policy path.

The New Zealand dollar extended its slump from the prior session, falling 0.4%, a day after a strikingly weak reading on the economy pushed yields sharply lower as markets ramped up wagers for bigger rate cuts ahead.

Cryptocurrency bitcoin was 1.4% lower at $115,944.